Nigeria's population is growing at an annual rate of 3.2 percent and stands at just over 140 million, a 63 percent increase in 15 years, population commission chairman Samu'ila Mukama has said.

"The total number of the Nigerian population is 140,003,542," Mukama announced in presenting the provisional results of the March 2006 census to President Olusegun Obasanjo in the federal capital Abuja on Friday.

I think it is just worth pausing to reflect on this one second: the population has increased by 63% in 15 years, or by a little over 4% per annum. This is massive (even allowing for some undercount last time) and shows clearly what an important problem continuing high fertility is.It is far from clear what is going to happen to Nigeria during the next few years, but one thing is sure, it won't be serious economic growth and development, however good the policy mix that is deployed (and the political instability that is almost inevitable makes good policy hard to expect). The preponderance of children will ensure that.

To try and understand in simple laymens terms why this is, take a look at this graph for Indian savings since 1970, and observe the steady secular rise.

India's growth suddenly took off around 2,000, and India may well now be about to move over from a middle class consumption driven growth process, to an investment lead one thanks precisely to the important increase in internal saving, an increase which has been made possible by the reduced numbers of chidlren who have been being born in most Indian states.

At the end of the day, one big chunk of growth isn't such a mystery after all: it's the fertility silly.

So we have not one, but TWO population problems on the planet at the moment. The elderly population one in the developed world, and the excessively young population one in the yet-to-develop world (the developing world is, of course, in transition from being excessively young to being elderly, and it is precisely at this point that you get all that sizzling economic growth).

The think is both of these problems are simply crying out for policy solutions to seriously address them, but in neither case does the offer meet the need.

Thursday, December 28, 2006

Two vaguely related pieces of news attracted my attention today: German women it seems are busy postponing childbirth, whilst US ones are busy accelerating them, which, of course tells me that everything in the world is as I thought it was. The postponement and acceleration in question here, however, is entirely conjunctural. First the Germans:

"Enticed by a generous German government aid program for newborn children that takes effect on January 1, expectant mothers are doing what they can to prolong their pregnancies until Monday."

Behind the rush to delay there lies, as the article suggests, a new law which comes into effect on 1 January 2007, and which offers mothers of new born children significant benefits:Worried about Germany's shrinking population and a birth rate that fell to a post-war low in 2005, the government introduced a law in September to encourage working couples to have children. They made January 1, 2007 the cut-off date.

Parents who take time off from work to care for newborns can receive two-thirds of their net monthly salary, or up to a maximum of 1,800 euros, for 12 months. If the other parent takes a further two months off, the benefit is extended to 14 months.

Now this move is obviously very welcome - although as a macro economist I would far rather that this was being paid for by a reduction in spending somewhere else and not by part of a 3% VAT tax hike, since the consequences of this on an already weak German consumption really are yet to be seen, and ageing populations involve difficult choices since resources are constrained, and growing debt is a problem which cannot simply be shrugged off, and at the end of the day governments have to take a stand in favour of the coming generations, even though this will never be easy.

Also of course it needs to be said that much as the present measure is to be welcomed, it is well short of what is actually needed. This post on Sweden gave some indication of the battery of measures that you need to actually have an impact on fertility, and of the degree of impact these can have on fertility (which is to say that such measures can nudge up fertility, but not dramatically, and they are very expensive when you add together the whole weight of the package up to the time of the labour market entry of the new child). Fertility in Germany is currently in the 1.3 range, so with a really effective pro-natalist package you might get up to 1.5/1.6 tfr, and remember none of this will impact the labour market for at least 20 years,and between now and then this is all on-cost for the society to assume, which is why such measures need to be paid for by savings elsewhere and not by increases in taxes.

Well, so much for Germany, but what about the US, well according to the New York Times:

In the last 15 years, there has been a huge increase in the number of births that are induced with drugs or come by Caesarean section. In either case, parents or doctors can often schedule a baby’s arrival on a day of their choosing.

Over this same period — since the early 1990s — the federal government has been steadily increasing the tax breaks for having a child. For parents to claim the full amount of any of these breaks in a given year, a child must simply be born by 11:59 p.m. on Dec. 31. If the baby arrives a few minutes later, the parents are often more than a thousand dollars poorer.

Unless you’re a cynic, or an economist, I realize you might have trouble believing that the intricacies of the nation’s tax code would impinge on something as sacred as the birth of a child. But it appears that you would be wrong.

In the last decade, September has lost its unchallenged status as the time for what we will call National Birth Day, the day with more births than any other. Instead, the big day fell between Christmas and New Year’s Day in four of the last seven years — 1997 through 2003 — for which the government has released birth statistics.

Now the theme which holds these two - apparently unrelated - posts together is the fact that they both consider the impact of a changing demographic environment on economic performance. In the US case, it is clear that a period of very favourable demography is now about to come to an end (not exactly a demographic dividend, but damn near one). What follows comes from Tim Duy:

This - his expression of his inflation concerns - is not, however, the most interesting point in Bernanke’s speech. Nor was his view on the housing market. More interesting was his clear words on potential output:

With regard to the labor force, research by the Board's staff highlights the role of demographic factors in determining the number of people available to work in the years just ahead. Most notably, the impending retirement of the baby boomers and the fact that women are no longer increasing their participation in the labor force at the rate they were in the past will tend to restrain the future growth rate of the U.S. labor force….Even if productivity growth is sustained at a reasonably good rate, the slower expansion of the labor force will imply some moderation in the rate of growth of potential output over the next few years. In the very near term, that slower growth in the labor force needs to be taken into consideration when assessing the sustainability of given rates of expansion in economic activity.

I myself am not convinced on the outlook for baby boomers. But that shouldn’t distract from Bernanke’s point that the Fed is looking at a lower level of potential output than market participants – which translates into a lower acceptable rate of growth. Of course, this point has been made before, but I don’t think the Fed believes market participants were listening. Indeed, Fed officials apparently felt a need to reiterate the point further that week. The same day, Philadelphia Fed President Charles Plosser noted:

Of course you might ask, what is trend growth? … Up until July, most economists would have said that the rate was somewhere close to 3.5 percent, assuming labor force growth of about 1 percent and productivity growth of almost 2.5 percent. However, in July, the government issued a benchmark revision to its estimates of GDP for the last three years. The fallout from that revision was that wages and employment grew somewhat faster than was previously estimated and productivity growth was slightly lower than we thought. As a result, the commonsense estimate of trend growth has now been lowered slightly. My own view is that trend growth is closer to 3 percent than 3.5 percent. Some even claim that trend growth is as low as 2.8 percent. I don’t think it is useful to quibble over two-tenths of a percentage point, since our ability to measure productivity is so fraught with problems. Nevertheless, almost everyone agrees that estimates of trend growth are now lower. Thus, when I say that growth should return to trend in 2007, I am expecting that growth will be near 3 percent. Note that this means that it should not surprise or concern us to see growth slowing from its pace of the last few years.

(NB all of the last extract has been either Tim Duy, or Bernanke and Plosser in the indents, Edward).

Now for Nanubhai on India:

Ajay Shah, the Economist, and various investment banks (including Morgan Stanley and HSBC) have repeatedly said that India is overheated – evidenced most clearly by the run-up in inflation, and also by ‘bubble-like’ real estate and equity prices. Skittishness about the policy direction of the current governing coalition supports the prevaling belief that a crash (or, for the less brave, a “cooling down”) is imminent. According to them, economic growth and/or asset prices are both set to decrease in the near-medium term.

They may well be right. Nevertheless, it is worth taking a look at the numbers and seeing exactly what has been powering economic growth in India over the last couple of decades. If we want to figure out where the Indian economy is headed over the next 4-5 years (as opposed to say, the next 4-5 quarters), surely this is better than looking only at the short-term indicators.

Our potential workforce (defined as people aged 15-64) has been increasing at about 2% a year – and is projected to continue at that rate at least till 2020. However, labor force participation rates vary substantially from state to state, between the sexes, and between rural and urban areas – as do unemployment and underemployment. Given that labor force growth (potential workforce x overall participation rate) has been averaging about 2% over the past 10 years, in the absence of better statistics, it is a safe assumption that overall employment is growing in the range of 1-2% and gradually accelerating. (If the projections are to be believed, then the real demographic dividend is expected to come between 2009-2015 when labor force growth will accelerate to about 4% per year).

Now the real heart of the capacity debate centers around this question: what is India’s trend rate of growth now and what will it be for the next few years?.....If you add up the numbers, it seems to me that at a minimum, trend growth is at 8% (5% TFPG + 2% labor force growth + 1% capital deepening) with the capacity to reach 10% (4.5% + 3.5% + 2%) in the coming years. The 6.5% baseline level of growth that the Economist and others use to form their assessments of the Indian economy is fundamentally flawed.

Two final points from me (Edward). Firstly all of this is about trend growth, and how quickly (or slowly, Germany, Japan, Italy) an economy can grow depending on the underlying demography, and secondly: WHO THE HELL EVER HAD THE TEMERITY TO SUGGEST THAT DEMOGRAPHY DOESN'T MATTER TO ECONOMICS.

But because the rate of return on an investment based account is much greater than the implicit return in a pure tax-financed system, the amount of saving that is needed is much less than the amount of additional taxes that would otherwise be required.

to which I made the following point:Again formally speaking this is surely true, but just what rate of return can be offered? No-one really knows. In fact the issue of just the level of the rate of return on private pension funds is much more a problem than that old bogey of 'stock market meltdown', but the problem isn't being thought about sufficiently.

Well lo-and-behold, just take a look at what came in over the Bloomberg wires this morning, in relation to the problems Pennsylvania's 200,000 public employees are having getting 'return' on their investments:

Dirty Wall Street Secret: Hedge Funds of Funds Pay T-Bill Rates

Pennsylvania's 200,000 public employees are paying Morgan Stanley some of the money-management industry's steepest fees to get returns that aren't much better than yields on U.S. Treasury bills.

For the privilege of investing in the $2.6 billion Institutional Fund of Hedge Funds, the Pennsylvania State Employees' Retirement System gives up about 2 percent of assets and 20 percent of any profits to Morgan Stanley and the management firms it hires. The so-called fund of funds is supposed to reduce the risk of investing in hedge funds while beating stock or bond returns. Instead, Pennsylvania made 5.1 percent through September when it could have earned 3.6 percent on T-bills, the world's safest investment.

Securities firms will collect more than $1 billion in fees this year to keep clients such as the New Jersey and Philadelphia pension plans invested in funds of funds. Those who assumed that Goldman Sachs Group Inc.'s Global Tactical Trading LLC would provide the best returns for the lowest risk in the hedge fund industry were mistaken. They got 1.7 percent through October -- a situation all too common on Wall Street, where every firm selling funds of funds is a winner even when their customers aren't.

``For these large institutions gathering assets is the name of the game, not performance,'' said Edward Bowman, a partner at Veritable LP, the Newtown Square, Pennsylvania-based consulting firm that oversees $8 billion for wealthy families.

Another of Goldman's funds of funds, Hedge Fund Partners LLC, made 5.6 percent for investors in the first 10 months of this year, compared with an industry average of 6.5 percent, according to Chicago-based Hedge Fund Research Inc. The $681 million fund, which is registered with the U.S. Securities and Exchange Commission, has trailed the industry by between one and three percentage points for each of the past three years.

Sunday, December 17, 2006

This is just a snippet. In this post we had some interesting discussion on the impact of migrants on population dynamics in Sweden and Minnesota (see especially comments). One of the conclusions which I think we reached was that the impact of migration on fertility depended on the level of fertility in the origin country and on the proportion of migrants in the childbearing-age-population. So I thought this recent news from Italy might be of interest. 10% of babies now being born in Rome are children of non-Italian nationals, and 13 if you include those with at least one non-Italian parent. Of course making extrapolations forward is much more difficult, since we don't know how rapidly migrants will keep arriving in Rome in the future, or what the future levels of migrant fertility will be once they have settled in the country. But it does re-inforce the point that migrants not only contribute to taxes, they also contribute to children, a point Marty Feldstein did not see to consider vis-a-vis the arguments in the last post.

Out of about 26,000 babies born in Rome in 2004, over 2,600 had foreign parents. That's what the latest issue of the journal "I numeri di Roma. Statistiche per la citta'" reveals, following a survey carried out with the Rome university 'La Sapienza' and the municipal statistics bureau. The figure actually soars to 3,800 including babies with one foreign parent, making the percentage 13 pct, and bound to increase over the next 15 years, to reach 24-32 pct. In 2020, one Roman baby in three could be foreign. "The figures confirm the opportunity to preserve and enhance the city's social services - said Marco Causi, municipal councillor for Economic policies and budget - particularly the maternal ones. Even cultural mediation services must be enhanced in schools, as well as shelter and counselling for families. We should also improve our integration projects, focusing on languages and multi-culturalism. These children are Roman citizens, not of Italian origin, and have the same rights of other children in social and school life, and must be given the same job and mobility opportunities"

Now since I am arguing that immigration is in fact a significant policy tool which can be leveraged to address the problems raised by population ageing, a clear clash of opinions would seem to exist. So who is right here?

Unfortunately the paper is only downloadable for those who have access to a university server, but I would encourage those who can to read the full paper, since I think the differences of opinion here go to the heart of many of the important issues in the 'ageing' debate, and it is important to have both sides of the story. That being said, I think most of what follows is comprehensible even if you can't read the paper (especially if you use the FT article as a back-up).

Firstly here's the paper abstract:The ageing of the population presents a major fiscal challenge for the countries of Europe. The combination of increased longevity and a reduced birth rate will directly reduce the growth rates of the European economies by slowing the growth of the capital stock and by weakening the productivity of the labor force. This slower growth of GDP means a smaller tax base and less tax revenue. In addition, the current tax-financed systems of social pensions and health care will require substantial increases in the already high tax rates. The analysis in this paper shows that the common prescription of increased immigration would do little to reduce the future fiscal burden. The increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits. The only alternative to significantly higher tax rates or substantially lower retirement income is to shift from a pure tax-financed system to a mixed system that supplements the tax financed benefits with benefits based on increased saving financial investment.

Now most of the points here are hardly new, but Feldstein's argument does have the virtue of being put simply, and in a non-technical fashion (which is why it is a pity that the whole paper is not more generally available to non-economists). Feldstein wants to argue that:

There may be many reasons to favour increased immigration....But it would be wrong to advocate increased immigration as necessary to deal with the fiscal consequences of an ageing population, or as a means to avoid large future tax increases or benefit reductions.

As we will see later this argument really comes in two parts:

i) that immigration is not necessary to deal with the fiscal consequences of ageing populations

ii) that immigration constitutes a way of handling ageing which enables you to do so without large tax increases or benefit reductions

On the first argument I want to suggest that Feldstein is simply wrong. Immigration is necessary to facilitate the handling of the fiscal consequences of ageing populations (where and for as long as it remains a possible policy option) in easing the process of transition away from Paygo systems.

On the second he is much nearer the point, as I see it immigration is simply one part of a policy tool kit, a kit which also should include pro-natalist policies, increased retirement age, tax increases and benefit reductions. Some combination of all of these is necessary, the 'in the ballpark' debate centres around precisely what mix is feasible and desirable.

Actually I would argue that the mix you can apply depends in part on the point in the demographic transition from which you start. Obviously if you are a country with a still comparatively young median age (say the UK or France at around 38) you have a far broader range of options in front of you than have Italy, Germany and Japan (whose median age has already risen to 43). Since the demographic transition is all about rising median ages, the importance of this point, and of acting sooner rather than later, should not be lost on anyone.

The core of Feldstein's argument is really the following:

Consider first the effect of slower population growth on the national saving rate. At any point in time, there are some households that are savers (i.e., consuming less than their entire after-tax income) and other households that are dissavers (borrowing or using up some of their previous saving). The savers are predominantly middle aged employees who are preparing for retirement. The dissavers are typically in their retirement years. In a growing economy there are relatively more middle-aged savers than there are older dissavers. That, together with rising per capita income, is what causes the saving of the savers to be greater than the dissaving of the dissavers. That difference between the saving and the dissaving creates a positive saving rate for the economy as a whole. The faster the population growth rate, the higher will the nation's saving rate tend to be. That explains why the aging of the population and the slower rate of population growth cause a decline in the share of national income that is saved.

Now this argument is both right and wrong in my opinion. Basically what he is saying is true IN THE VERY LONG RUN. But it entirely misses the point that we on Demography Matter have been trying to focus attention on, which is THE TRANSITION DYNAMICS of the ongoing demographic changes.

Especially I would draw attention to this phrase:That explains why the aging of the population and the slower rate of population growth cause a decline in the share of national income that is saved.

If we are to address this issue adequately then we need to start from the current reality, and from what we actually know of the economic dynamics of population ageing, and what better place to start than with those three famous prominent elderly societies that I tend to go on so much about - Germany, Japan and Italy. These three are important since they are the ones who have gone furthest with the transition. Now if we look at them as a group the first thing which we should note is that they are hardly to be singled out for an absence of savings. At the same time we could note that all those equally famous 'anglo' consumer debt societies - the ones where saving constitutes a pretty low share of national income - seem to share the characteristic that they are - in population median age terms - significantly younger. So what I think is that we have a calibration problem here in the application of the life cycle savings and borrowing model to populations (read Modigliani for the life cycle theory here), and strangely very few people seem to date to have woken up to this. Massive dis-saving may of course come one day (although this isn't as clear as it seems to Feldstein, since, and possibly for reasons like presence of bequest motives, people do not seem to dis-save that dramatically as they age). That ultimate theoretical possibility should not detain us too much at this point, however, since it should really be what happens before we get to the dis-saving median ages that holds most of our attention at the present time, since if some part of the whole demographic transition process is path dependent, then what happens earlier should be considered to be important as it may well influence what happens later.

Also the following assertion from Feldstein - in a globalised world - doesn't necessarily hold:

This lower rate of saving will in turn lead to a lower rate of investment in business plant and equipment.

since as we all know the saving which is needed may simply take place elsewhere (as we can see from the case of the United States at the present time). Now in fairness to Marty he does immediately qualify his argument when he comes to look at Spain (which is his test case, presumably since Spain has been the recent recipient of quite a lot of immigrants and it is really this component he wants to look at):

Although in principle Spain could in the future supplement its lower saving rate by importing capital from other countries, this is not likely to happen in practice for two different reasons. First, the other industrial countries are also experiencing slower population growth and that will cause their saving rates to decline. So they too would want to import capital and would not be in a position to shift capital to Spain. Moreover, experience shows that, oversustained periods of time, industrial countries invest what they save at home. So even countries with higher saving rates will tend to keep the extra saving at home.

That is why (for example) this post from Claus is also interesting about the topic of growth and immigration, since it looks at empirical work from the Bank of England on the impact of immigration in the UK, and it is precisely this point about the impact of immigration on transition dynamics which I think more or less invalidates the thrust of the argument that Feldstein wants to make. Obviously if, say, Spain manages to leverage immigration to delay the arrival of a median age of 43 by 20 years then Spain will have bought time, and time in this case is very much knowledge, since we will have learnt a lot more about all of this twenty years from now.

So what I want to argue is that while immigration certainly cannot solve the long term demographic transition steady-state problem, since high median ages eventually come to everyone, it is also important to bear in mind that here, as ever in economics, timing does matter (again, this appreciation is the real legacy of Keynes). As we all know only to well, in the long run we are all dead, but even if we imagine that at this point - in an extremely theoretical sense - as a species we are going to become extinct at the rate we are going given the steady extension of below-replacement fertility rates, this doesn't really mean that this has become an immediate issue, and sometimes it is worth focusing on immediate issues and leaving tomorrows problems for tomorrow's generations (always provided we do this responsibly).

At the same time I would like to say that Marty Feldstein is, of course, a very able economist (and indeed he was one of the first in the 1980s to sound the wake-up call among economists about the whole ageing issue), so please don't miss the fact that he does make many very valid points. Such as this one for example:"An aging work force also lowers productivity growth directly. We know from experience that each generation of employees earns more than the previous generation. One reason for this is the improved level of education and of skills that the new generation brings to work. We are all aware of the greater facility that younger workers generally have in using computers and the internet. Younger workers also generally learn new skills more readily. So an aging workforce means lower increases in productivity from this source as well."

This is noteworthy since there would many who would try to avoid drawing this conclusion, but as I attempt to argue in this post, there are sound theoretical reasons for thinking that Feldstein is right here.

On the other hand Feldstein seems to completely miss another important part of the overall picture, which is the fact that we are currently seeing a dual process of weakened internal consumption in the elderly trio (Japan, Germany and Italy) and a chain of trade and international-capital-flow imbalances (that are in fact at the very centre of contemporary macroeconomic debate) which can very plausibly be argued to have something to do with the differential demographics of the various countries involved.

For one summary of how these two elements (demography and imbalances) may be inter-related see this paper by Ralph Bryant, which *is* downloadable (although also note that it is in pdf format):

"Asymmetric Demography and Macroeconomic Interactions Across National Borders"

Now I have one last niggle before I finally shut up. I sometimes wish economists were forced to do a short course in philosophy, logic and reasoning. because at times I feel they need to learn the meaning of logical quantifiers like "some" and "all", quantifiers which seem to be so vital to a healthy reasoning process. Take this as one bad example of how not to reason:

Although there is general discomfort with some of the social consequences of increased immigration, many people have concluded that increased immigration is the "only way" to avoid a major increase in tax rates or a major cut in benefits.

Now what I would ask Marty directly is just who these people are who have reached the conclusion that "the only way" to avoid a major increase in tax rates or a major cut in benefits is immigration (we wouldn't want to be demolishing a straw man, now would we?). In fact I doubt that there is anyone who has seriously thought about the problem who thinks it is possible to avoid some measure of both spending cuts and increased taxation. Indeed immigration is not part of any "only way" strategy anywhere to my knowledge. Certainly the EU's Lisbon Agenda doesn't say this, and indeed far from it. Those of us who are on the Demography Matters Blog are perhaps among the people who have taken the 'positive impact of immigration' argument farthest, but to my knowledge we are only saying that immigration can *help*, and for the reasons outlined above (many of which Feldstein fails to appreciate the importance of).

In fact the main argument he addresses is this one:

The presumed advantage of increased immigration as a policy response to the aging population is that it would help to finance the benefits of the aged.

As I am saying, I don't think this is the *only* presumed advantage. Again it is obvious that immigration can help fund taxes in the short term, but the force of the argument about such immigration is that this short term benefit helps buy time and offers us all a pathway to try and equilibrate the global imbalances which, at the end of the day, are the heart of the problem.

Actually I would only too readily agree with this point:

Stated differently, the increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits.

And again Marty is not entirely off-target when he talks about the ways in which the Lisbon agenda is being interpreted at nation state level, and in particular in Italy, and Germany where a very heavy reliance is being placed on raising taxes rather than cutting spending, and as we may well be about to see this can prove to be very problematic, so I don't disagree with him at all here. But I'm not entirely sure that it is the Lisbon agenda itself that is responsible for this, as opposed to the ridiculous way in which the EU Growth and Stability Pact has been trivialized and effectively ignored. Of course this deaf ear will ultimately come with a price.

There is one last issue raised in the paper which I would like to touch on in this post, and it is the following one:Shifting from the current pure pay-as-you-go tax financed systems of pensions and health care to financing based on a combination of taxes and financial investments could reduce the burden on future generations of employees and taxpayers without lowering the standard of living of future retirees.

In principle this idea is sound and has merit, but methinks it is not as straightforward as it seems. Indeed I could at this point throw the ball back to Feldstein and say that if this is the *only* policy instrument deployed, then it simply won't solve the problem. There are two main issues presented here, and I would like to try and explore both of them in more depth during the course of 2007:

1/. The saving and investment consequences of a change in the way pensions are funded may not be quite the ones which Feldstein anticipates, since obviously (as he to some extent recognises) there will be consequences for the savings behaviour of the younger age groups. The changes will effectively mean that these groups have both to pay taxes to finance the outstanding liabilities to those who are already old and save for their own private pension plans. There is no doubt that this has to happen, but there are issues about how rapidly this can take place without crashing consumption. This is where the immigration argument does become important. Since Feldstein does not address the consumption issues he just doesn't see this part.

In the US there is no doubt that any such savings shift would be beneficial, but then we get to the 'uncoupling' issues which so preoccupy Claus Vistesen. How does the rest of the world - and in particular those countries who need to run surpluses, handle this situation?

Also, even though I have been drawing attention to the relatively high saving which is taking place in Japan etc, we really have no measure of whether these countries are doing *enough* saving in relation to the challenges they face (private saving has been in secular decline in Japan in recent years), and this is just one more topic which economists in general need to start getting to grips with. But if such countries need to start to save even more, what does this imply for the level of exports they will have to depend on, and where exactly will all these exports go?

2/. Feldstein (and indeed most other commentators) assume that private pensions can offer a good rate of return:

But because the rate of return on an investment based account is much greater than the implicit return in a pure tax-financed system, the amount of saving that is needed is much less than the amount of additional taxes that would otherwise be required.

Again formally speaking this is surely true, but just what rate of return can be offered? No-one really knows. In fact the issue of just the level of the rate of return on private pension funds is much more a problem than that old bogey of 'stock market meltdown', but the problem isn't being thought about sufficiently. Actually the whole central bank debate about global liquidity has something to do with this (and I can't help asking myself whether in the background the central bankers are not in fact bright enough to be actually thinking about this one), and clearly the savings glut is also to do with the investment dearth, but how do you maintain a good rate of return when the ratio of savings to investment rises sharply globally. The whole debate about increasing risk appetite and emerging markets is surely to do with this.

So with increasing dependence on private schemes this problem would only grow, as the level of funds looking for a viable rate of return will only increase, and struggle as they might the central bankers will find it hard to push interest rates up significantly with so much liquidity floating around.

This is why I feel putting the focus on global imbalances is so important in this context, and it is also why I think it important to find policy solutions which take the imbalances as their starting point, since they are surely at the heart of the problem.

One last small gripe: why do people keep putting the focus on this as a purely European issue? (Note the title of Feldstein's paper). Declining fertility and increasing life expectancy is a global phenomenon, and if we are ever to find a way of adequately handling population ageing then I think we need to see this as a global, and not a national level problem. The real issue posed by the pyramid inversion which is associated with the ongoing demographic transition is actually how to shift from a paygo to a post-paygo environment with the least possible collective damage. That not everyone in the United States has quite the limited perspective on this that Marty Feldstein seems to have can be seen from this recent speech from Ben Bernanke.

Wednesday, December 06, 2006

Now I am certain that Phillip Longman's article from the March issue of Foreign Policy - "The Return of Patriarchy" did not escape the attention of the readers and contributors of this blog. I wanted to revisit it in order to highlight the points which Edward discussed in his latest post. Longman argues:

"As governments going as far back as imperial Rome have discovered, when cultural and economic conditions discourage parenthood, not even a dictator can force people to go forth and multiply."

He goes on to argue that those who continue to have a large number of children are decidedly politically conservative, and by Darwinian inference, destined to inherit the earth. It's really quite a neat theory. Like in economics, it is tempting to make demographic generalizations because it presents us with the illusion that we either have a definitive answer and/or a solution. However, as I have learned in the last few months, the devil really is in the details.

First problem is that, today, low fertility exists in poor and rich societies alike. Secondly, the causes of low fertility are not the same across the board - in some places, it's because it is too expensive to have lots of children, in others, it's because the government tells you that you can't. Thirdly, different societies have different appetites and capacity for change - some can adjust as they get richer, others can't. And finally, there is that massive elephant in the closet: Globalization. People the world over can increasingly choose where to live and have children, and no one could definitively tell you how this 're-alignment' will play out.

I bring up the article only because when I read it in March, I bought in to its conclusions hook, line, and sinker: it appealed to my economic sensibilities. Having been (at least partially) educated about the intricacies of demographics, it would take a lot more thoughtful analysis to convince me.

Friday, December 01, 2006

Well according to Anders Björklund, of Stockholm University, and based on the Swedish experience, it does. The linked paper is in fact his presidential address to the European Society for Population Economics meeting in Athens in 2001. Björklund's arguments are interesting, especially for those who have been following the discussion we have been having on DM about the birth postponement phenomenon: in fact much of the fluctuation in registered tfrs seen in Sweden can be related to this postponement process (average age at first birth in Sweden is now around the 29 mark), and the conclusion he comes to is a surprising one, that pro-natalist policy has been particularly effective in Sweden (even when compared with other Scandinavian countries) because the package has inadvertently (that is it was not the original explicit objective) incorporated a 'speed bonus' which encouraged families to move rapidly from the first child to second and subsequent ones and this has had an impact on fertility.

Now this impact is important due to the fact that higher order 'spacing' (ie the time between the first and subsequent children) is a key factor in producing a situation that women who want to have more children are, in fact, unable to do so, since as they become older infertility becomes an increasing problem. By encouraging women to have a second child rapidly after the first one some of this 'unwanted childlessness' is reduced. So it is this component in the package that seems to be important, and there would certainly seem to be lessons for others here.

In comparative terms Björklund look at fertility outcomes in Sweden, Denmark, Finland, France, Belgium and the Netherlands. The question he tries to address is the following one:

"Can public policies boost fertility in a modern society by providing financial and in-kind support for families with children? "

He suggests it can, and he advances three arguments to support his claim:

First, family policies were expanded quickly in Sweden. From the early 1960s to around 1980 (i.e., in less than 20 years), the generosity increased markedly – for paid maternity leave, subsidised child care, paid leave to take care of sick children, and universal child allowances. In retrospect, the speed with which these policies were extended is striking. Second, as already alluded to, several policies had a specific design, namely, that they facilitated labour force participation for mothers. So the policies potentially could affect the structure of fertility, i.e., timing, spacing, and socio-economic differentials, as well as the overall level of fertility. Third, pronatalistic arguments did not motivate the policies. In particular, they were not the outcome of a low-fertility period. This fact does not naturally guarantee that the expansion of family policy can be considered exogenous with respect to fertility. But it would have been more problematic to interpret the Swedish experience if, e.g., a sharp drop in fertility rates had preceded the introduction of the new policies.

As he says:

Rapid family policy expansion from the early 1960s to around 1980 implies that those generations of women who planned their childbearing before the expansion, i.e., women born during the 1920s and most of the 1930s, faced markedly different incentives than women born from the 1950s and onward. So I study changes in fertility patterns between these generations of women in Sweden. Because fertility patterns could change for reasons other than policy changes, I compare the evolution of fertility patterns in Sweden with the evolution in other countries. I primarily compare Sweden with its Nordic neighbours (Denmark, Finland and Norway). In many respects, these countries pursued the same family policy, but they did not go as far as Sweden. I also compare the evolution in Sweden with continental European countries (plus the UK) that pursued quite different family policies compared to Sweden.

Björklund provides a convenient table-summary of the child related policies implemented in Sweden (I won't try and summarize these here, but would rather recommend reading the full paper). One interesting detail is worth highlighting:

The Swedish rules that determine maternity-leave benefits also contain elements that create a kind of speed premium on further childbearing. Because maternity-leave benefits are earnings related, a period of no work or only part-time work after a birth would reduce the benefit level after a subsequent birth. But during the late 1970s and early 1980s the rules became successively more generous in allowing the parent to retain the right to the benefit level that she once had obtained by working full-time before the first, or any previous, birth. From 1974 to 1979, the parent could abstain from work-related earnings for 12-18 months (depending on local practice of the rules) and yet retain the right to a previous benefit level for subsequent births. From 1980-85 the interval became 24 months, and in 1986 it was prolonged to 30 months; from 1980 onward, there was no local variation in the rules.

As we will see in coming posts this element may be considered important since, given that the average Swedish woman now has the first child at a rather high age any subsequent delay carries with it an ever increased risk of encountering infertility problems.

Also the provision of child care seems to be important:

Local-government-subsidised child care in care centres is another important result of policy. In the early 1960s only some part-time options were offered, but from the late 1960s onward a major extension occurred. Because local governments have been the major providers of child care, there has always been some variation in coverage and rules; the general ambition has been to provide care that allows both parents to work full time. Further, the fees have only covered about 10-20 percent of all costs; often, the fees have been even lower for the second child and subsequent children. Only families with two working (or studying) parents have been eligible for this subsidised care.Besides care for pre-school children, local governments provide subsidised morning and afternoon care for school children up to about age 10 (the school-starting age is 7 in Sweden). This care also rapidly increased over the same time period.

There are also further pro-employment elements:

Sweden also used labour relations legislation to facilitate the combination of childbearing and mothers participating in the labour market. In 1979 the parliament took an important decision that gave young children’s parents the right to cut back their working hours from full time to 75 percent. This right makes it easier for parents to take part-time leave. Parents can exercise this right until children reach age 8.

There is also, of course, a cash payment child allowance system:

The major form of cash support for families with children is the universal child allowance that was introduced in 1948. A non-taxable fixed amount per child is paid each month to the mother......the real value of this benefit increased during the period. And in 1982 a higher amount for the third child and subsequent children was introduced. Besides this universal allowance, families with children can become eligible for means-tested housing allowances and social assistance benefits.

Now as he suggests:

The main reason why family policy could affect the level of completed fertility is that such policies cut the cost of having a child.

Also:

The policies could also affect timing of childbearing, i.e., the age at which women decide to have children. To be eligible for the bulk of benefits that Swedish family policy offers, it is important to have become reasonably well established on the labour market. The parental-leave system is earnings related. So women, who have not worked full time or women who have had a low monthly salary the year before childbearing, receive lower benefits for the entire parental-leave period. Much anecdotal evidence suggests that a typical strategy for women in Sweden who plan to have children is:

1. Complete your education. 2. Get a job and work full time for at least half a year; ensure that you get a permanent position so that you can return to your employer after parental leave.3. Get the first child 4. Work part time for a while, and use subsidised day-care until you get the next child.

Because of the legislation, I expect that in Sweden, the average age for first births became higher than it would have been without implementation of the legislation.

Since however average age at first child has in fact been rising across much of the EU in recent years it is difficult to assess the extent to which this effect operates, and indeed Sweden may simply have had the good luck to produce a policy which in fact was (unintentionally) geared to facilitating decisions which many would have been trying to take even without the presence of the policy.

Also not without interest:Instead, promotion of gender equality in the labour market was the major goal for these policies.

So in fact the fertility boost was something of an unanticipated spin-off from an attempt to achieve another objective.

Bjorklund is primarily interested in the impact of policy on the level of completed fertility. He looks at the evolution of cohort fertility rates for women born between 1925 and 1958 for a number of countries and he finds that the Swedish rates are remarkably stable around 2.0 over the entire period. Also a before-after perspective suggests that there were no effects from the distinct extension of family policies. By adopting a difference-in-differences approach, however, he was also able to draw another conclusion:

In all other countries, cohort fertility rates declined, and in some countries, they declined considerably. We start by comparing Sweden with its Nordic neighbours. An application of the difference-in-differences approach means that the stable cohort fertility rate in Sweden is compared with declines from the early 1930s to the 1950s by about 0.4 in Finland and Norway and 0.5 in Denmark. So these are the magnitudes of the estimated effects on the level of fertility of the more generous family policy in Sweden compared to the other countries......it is somewhat striking that Sweden is the only country with stable cohort fertility over this period.

As he notes:

The conclusion in the previous section might sound strange for those who have followed the Swedish experience and discussion since the early 1990s. After a peak at 2.14 in 1990, the period total fertility rate declined sharply to 1.50 in 1999 and showed only a minor recovery to 1.55 in 2000.10 (See Figure 7.) Is this development really consistent with the conclusion that Swedish family policy has permanently raised the completed fertility rate?

In order to try and shed some more light on the apparent inconsistency here, he examined cohort fertility rates of women born in Sweden up to 1965 and who had children up until 2000. He found that women born as late as 1965, whose childbearing up to the age of 35 is captured in the data, had already reached the quite high level of 1.70 children on average, and he therefore suggests that it seems reasonable to think that the prospects of reaching a completed fertility rate close to 2.0 are quite good for women born up to 1965. However he cautions:

"low fertility rates during the 1990s suggest that cohorts born after 1965 must space their children very closely to reach the fertility level of the preceding generations of women."

Spacing matters, in other words. One worry he had was whether in fact the policy applied in Sweden might be actually encouraging women to postpone childbearing, since they might be lead to wait till they had relatively higher income levels so as to gain the maximum benefit from the compensatory payments system. However he discounts this conclusion since he finds no striking difference between the evolution of postponement in Sweden and in the other countries for which he was able to acquire data.

"There is a U-shaped pattern in data for all six countries with lows in the mid-1940s. Since then, the age at first birth has increased. In particular, the increase in the Netherlands is marked despite a family policy that is very different from Sweden’s."

The conclusion to his cross country analysis are very interesting indeed. What he concluded was:

First, fertility patterns based on educational level are very similar in all countries for which I was able to find data. Evolution over time, according to educational level, is also stable; the decline in completed fertility rates in countries other than Sweden can be seen in all education groups. Second, postponement of the first birth can be found in all countries for which I have data. Third, spacing patterns for women who have given birth to two, three, or four children are not very different in Sweden, France, Norway, and the Netherlands. Of these three similarities, I am most struck by the last one. Although there is a pattern that is consistent with an effect of the speed premium in the parental-leave system, the similarities among the countries are more marked than the differences...........One explanation could be that the apparent effects on spacing in the micro data are primarily not pure spacing effects but rather effects on the level of fertility. If some of those women, who gave birth to two or more children in short succession because of the parental-leave rules, with other rules would have waited a longer time before trying to get additional children, they might have failed to get these children. In that case, the effect of the parental-leave rules is rather on the fertility level than on spacing conditional upon a final number of children.

That is to say, for those women who actually had second, third children etc, the spacing patterns are very similar across the countries studied, however in Sweden slightly more women had more than one child, and this leads him to think that this result was produced by the fact that those women, had they taken more time to try and have children might never have been able to have them. Fascinating.

This post is related to both the one which comes before it and the one which follows. CFR refers to cohort fertility rate and TFR to total fertility rate.

Fertility can be measured in a number of ways, and two of the most important of these are the total fertility rate and the cohort fertility rate. The total fertility rate (TFR) is an estimate of periodic fertility and is defined as the sum of number of children born by women in a defined age range (16-49) extrapolated to the lifetime fertility of the total number of women in that age group. The cohort fertility rate (CFR) is the average number of children which women actually give birth to during their lifetime fertility cycle, and is only known when the women in the cohort end their fertile life. CFR is an accurate and important indicator since it measures whether the completed fertility for women achieves replacement level or not. The replacement level is the number of children per woman (approximately 2.1) needed in order to hold the population constant.

In periods of rapid birth postponement significant differences may exist between the Tfr (estimate) and the final Cfr. This is clearly indicated in the case of Sweden by the two graphs below.

As can be seen while recorded Tfrs were continuously well below replacement level, Cfrs for cohorts up to the 1955-59 cohort have been quite stable, and at more or less the 2.0 level quite close to replacement level.

This is not to say that the postponement phenomenon is entirely benign, as the 'missing births' do of course influence the shape of the population pyramid.